Lending Club Loans - Months of Payment before Default

In the last post, I reviewed the defaults based on loan issued date. As I mentioned in the previous post, due to point in time snapshot of historical loan data that Lending Club provides, it is difficult to determine exactly when a loan actually was charged off or defaulted.

Months of Payment

In this post, I will review the defaults using a different methodology. Before a loan is charged off or defaulted, borrowers stops making monthly payments on the loan. Based on the total payments made by borrower, we can determine approximately the number of months or number of times monthly payments were made before loan was charged off.

The months of payment will always be smaller than when actually loans was charged off as Lending Club can take significant time to write off a loan once payment stops. Also, as there is no information about partial payments and any late fees in historical loan data file, this analysis assumes that all payments were made toward monthly payments.

Loan Length

The chart below shows the percentage of defaulted loans as a function of number of monthly payments made for 36 month and 60 month loan terms.

At first glance, someone may make following observations:

• The 60 month loans default quicker than 36 month loans.
• Most 60 month loans default within first 24 months.
• Both 36 and 60 month loans have similar default trend within first six months after loan issued date.

Such conclusion may not be correct. While 36 month loans of at least three vintage issued years have reached full maturity, none of the 60 month loans have gone through complete maturity cycle. The 60 month loans were first issued in early 2010. This is the main reason why the curve for 60 month loans gives the impression that most defaults happen within first two years.

Following observations can be made for default behavior of 36 month loans:

• About 20% of all defaulted loans make five or less monthly payments.
• About 50% of all defaulted loans make ten or less monthly payments.
• About 80% of all defaulted loans make twenty or less monthly payments.

Put another way, we can expect half of our default loans to occur before a borrower makes ten complete monthly payments. Assuming Lending Club takes on average four months (120 days) after payments stop to charge off loan, we can expect half of our defaults to occur by 14th month after issue date.

Credit Grade

The chart below shows the percentage of defaulted loans as a function of number of monthly payments made for different Credit Grades.

There doesn't appear to be any significant difference in default trend for loans with different credit grade. The separation of curves for Grade E, F, and G from rest of the pack at 15 months of payment and higher may suggest that greater number of such loans are defaulting earlier. Majority of E, F, and G grade loans are of 60 month term. As mentioned earlier none of the 60 month loans have reached full maturity yet. The separation in curve is most likely result of incomplete defaults data for 60 month loans to maturity.

Key Takeaways

• We can expect half of our default loans to occur before a borrower makes ten monthly payments, i.e. by 14th month after loan issue date.
• It is too early to compare default trend of 60 month loans with that of 36 month loans.
• There is no significant difference in default trend for loans with different credit grade.